Common Futures Trading Terms Explained

Understanding the language of futures trading is key to building your confidence as a trader. In this article, we break down common futures trading terms in simple language, using examples related to the asset classes NovaBloom offers (stock index futures, currency futures, energy and metal commodities, agricultural commodities, and cryptocurrency futures). By the end, you’ll be able to read a futures contract specification and understand terms like tick size, contract size, expiry, margin, and more. Let’s demystify these concepts one by one.

Tick Size and Tick Value

Tick Size is the minimum price increment by which a futures contract can move. In other words, it’s the smallest possible change in price up or down. Each futures market sets its own tick size. For example, the E-mini S&P 500 stock index futures has a tick size of 0.25 index points. This means if the current price is 5550.00, the next possible price up or down is 5550.25 or 5549.75 – it moves in increments of 0.25. Some markets have very small tick sizes (like 0.00005 for certain currency futures), while others use larger fractions (like 1.00 for the Dow Jones micro contract, which moves in whole-point ticks). Tick size is set by the exchange and ensures prices move in standardized steps.

Tick Value is how much one tick of price movement is worth in money. This depends on the contract’s size or multiplier. Essentially, tick value = tick size * the contract’s value per point. Using the E-mini S&P 500 example: each 1.00 point move is worth $50 per contract (this is the contract’s fixed multiplier), so a 0.25 tick is worth one-quarter of that, which is $12.50. Thus, a single tick up or down in the E-mini S&P will gain or lose $12.50 for one contract. By contrast, the Micro E-mini S&P 500 contract is one-tenth the size, with $5 per point, so its 0.25 tick is worth $1.25. Every futures contract has a defined tick size and a corresponding tick value. For instance, Crude Oil futures (CL) have a tick size of $0.01 per barrel and a contract size of 1,000 barrels, making each tick worth $10 (0.01 * 1000). A smaller Micro Crude Oil (MCL) contract represents 100 barrels, so a $0.01 move there is only $1 per tick.

Understanding tick value is important for gauging profit and loss. A trader should know “Each minimum price move will make me or cost me X dollars.” For example, if Gold futures (GC) move by one tick (which is $0.10 per ounce), the standard 100-ounce gold contract will gain or lose $10 per tick, whereas a 10-ounce Micro Gold (MGC) contract would only move $1 per tick. Always check the tick size and tick value of any contract you trade, as they vary across products. Highly traded contracts tend to have smaller tick sizes, while less liquid contracts might have larger tick increments. Knowing the tick value also helps you scale your position size and risk, since it tells you the monetary impact of the market’s smallest move.

Contract Size

Contract Size (sometimes called lot size or multiplier) is the specified amount of the underlying asset that one futures contract represents. It defines how much of the commodity, currency, or index you are controlling with one contract. Each futures product has a standardized contract size set by the exchange. For example, one Crude Oil (CL) futures contract represents 1,000 barrels of oil. If oil is trading at $75 per barrel, that one contract covers $75,000 worth of oil (often called the notional value of the contract). Similarly, one Gold (GC) futures contract represents 100 troy ounces of gold, one Silver (SI) contract is 5,000 ounces of silver, and one Corn (ZC) futures contract is 5,000 bushels of corn. In the currency markets, a standard Euro FX future (often symbolized as 6E) represents €125,000, and a British Pound (6B) future represents £62,500. For stock index futures, contract size is often given by a multiplier: for instance, the E-mini S&P 500 contract is $50 times the index value (so at 5500 index points, it controls $275,000 of equity value).

Contract size matters because it directly affects the scale of your trade. A larger contract means each price movement has a bigger impact on your P/L. Many futures now come in different sizes. For popular products, exchanges offer “mini” or “micro” contracts to allow smaller traders to participate. For example, the Micro E-mini Nasdaq-100 (MNQ) is 1/10th the size of the E-mini Nasdaq contract – it represents $2 times the index instead of $20, significantly reducing the notional value and tick value. Likewise, Micro Bitcoin futures (MBT) represent 0.1 BTC, whereas the standard Bitcoin futures contract represents 5 BTC (50 times larger). By choosing an appropriate contract size, beginners can manage risk more easily. Always be aware of how much underlying asset one contract is worth. It will help you understand the potential dollar swings in your trade and ensure the position size aligns with your account size. If one corn contract at 5,000 bushels is too large for your comfort, you might opt for smaller contracts (if available) or adjust how many contracts you trade.

Contract Expiry (Expiration)

Unlike stocks which you can hold indefinitely, futures contracts have an expiry date. The contract’s expiry (or expiration) is the date when the futures contract “ends” and is settled. Each futures contract is listed for a specific month (or even a specific day for some weekly contracts), and trading on that contract ceases after its expiry date. For example, you might buy December Crude Oil futures or September S&P 500 futures; in each case, that contract will expire (usually toward the end of the prior month for commodities, or a set quarterly cycle for indices). On the expiry date, all open positions are settled by the exchange.

What does this mean for traders? Essentially, you cannot hold a futures position forever – when it hits expiry, something will happen: either the contract will convert to the underlying asset or cash will change hands based on the final price. If you’re still holding a futures contract when it expires, the exchange will automatically finalize (settle) the trade for you. You can no longer trade that contract once it’s expired; it “disappears” and a new contract with a later expiry becomes the active one or ‘front month’. Expiry dates are standardized and known in advance. Some contracts expire monthly (e.g. crude oil has monthly expiries), while others follow a quarterly cycle (e.g. stock index futures often expire in March, June, September and December). The key point is that futures are time-bound agreements. Expiration forces a conclusion to your trade on a set schedule.

Most retail traders avoid holding contracts into the final expiry day. Instead, they close or roll over their positions before expiry (more on rollovers below). It’s important to keep track of when the contracts you’re trading will expire. If you don’t pay attention, you could wake up to find your position has been closed out or is in the delivery process. In summary, contract expiry is the built-in end date of a futures contract when it must be settled. This mechanism comes from the roots of futures in physical commodities (farmers and buyers set a future date for delivery). Even though today we trade futures for speculation, the expiry dates remain a fundamental feature.

Settlement (Cash vs. Physical)

Settlement refers to how a futures contract is resolved at expiry. When a futures contract expires, it goes through a settlement process determined by the exchange and the contract specifications. There are two main types of settlement:

• Cash Settlement: Many futures, especially financial futures (like equity indices and currencies) and cryptocurrency futures, are cash-settled. This means no physical goods change hands at expiry. Instead, the exchange calculates a final settlement price (often based on an average of prices or the last traded price), and your account is credited or debited in cash for the profit or loss on the contract. For example, the E-mini S&P 500 and Micro Bitcoin futures are cash-settled. If you were long one Micro Bitcoin futures at an entry price of $55,000 and it expires with a final price of $56,000, the exchange will add the $1,000 gain (0.1 BTC * $10,000 increase) to your account in cash. There is no delivery of actual Bitcoin; settlement is purely a financial adjustment. Cash settlement is convenient for contracts where delivering the underlying is impractical or for assets like Bitcoin where the exchange just uses a price index.
• Physical Delivery: Some futures, particularly commodity futures, settle by physical delivery of the underlying asset. This means if you hold the contract to expiration, you are legally obligated to exchange the actual commodity. For example, a holder of a Crude Oil futures contract at expiry could be required to deliver or receive 1,000 barrels of crude oil (at a designated delivery point like Cushing, Oklahoma). Similarly, Gold futures can result in the delivery of 100 ounces of gold bullion, and agricultural futures like Corn or Wheat can result in many bushels of grain being delivered. OThat’s why brokers will force liquidate or prevent new trades as physical delivery dates approach, unless you’re approved for delivery. Physical settlement is primarily designed for commercial participants (like farmers, oil companies, jewelers) who actually want to exchange the commodity.
• All Novabloom futures are cash settled, giving you piece of mind around settlement dates, as no physical delivery can occur.

In practice, retail traders nearly always close or roll over positions before any delivery obligations. If a contract is physically deliverable, there is usually a last trading day that is a bit earlier than the final expiration date, to ensure the delivery process can begin. For instance, a crude oil contract might stop trading a few days before month-end expiration, to sort out who’s delivering oil to whom. If you forget about an expiring position, your broker will likely close it for you to avoid physical settlement.

Key takeaway: Settlement is what happens at expiry – either a cash P/L adjustment or the transfer of a commodity. Stock index, currency, and crypto futures are generally cash-settled (no fuss with delivery), whereas commodity futures (energy, metals, agriculture) are often physically settled if held to term. Always know which type of settlement your contract has. As a beginner, it’s safest to stick to cash-settled contracts or be diligent about exiting before expiry on physical ones.

Leverage in Futures

One of the biggest differences between futures and, say, stock trading is the built-in leverage. Leverage means you can control a large amount of an asset with a much smaller amount of capital upfront. Futures are inherently leveraged because of the margin system. In simple terms, leverage is the ratio of the contract’s full value to the money you need to put up. For example, controlling a $75,000 crude oil contract might only require about $5,000 of margin – this is roughly 15:1 leverage, since $5k is about 6.7% of $75k. It’s as if you made a 5% “down payment” to get exposure to the whole contract. This ability to amplify your trading power is a double-edged sword. On one hand, it allows for significant profit potential with relatively small capital. On the other hand, it amplifies losses just as much as gains. A 1% move in the underlying asset will result in a much larger percentage change in your account equity when using high leverage.

In futures trading, leverage is not a fixed number but rather determined by the margin requirement. If a contract requires 10% of its value as margin, you have 10:1 leverage (because you’re effectively borrowing the other 90% ). If only 5% margin is required, that’s 20:1 leverage. NovaBloom’s product lineup, like most futures, includes contracts with varying leverage. For instance, Micro contracts have smaller notional values but often similarly lower margins, so the leverage might be comparable to their larger counterparts in percentage terms. Always be aware of how much leverage you are using, as it directly affects risk.

A helpful concept is notional value: this is the current market price times the contract size (the full value of the contract). If you divide the notional value by your account equity (or margin used), you get an idea of your leverage. High leverage means even a small move against you can eat a big chunk of your account. For example, a 2% drop in an index could wipe out a 40:1 leveraged position (because 2% of the notional is 80% of the margin in that case). As a beginner, it’s wise to use leverage cautiously. The futures market gives you the power to leverage up, but you don’t always have to max it out. You can trade micro contracts or fewer contracts to effectively use lower leverage. Remember, leverage is a tool – used wisely it can boost efficiency, but used recklessly it can lead to rapid losses.

Margin (Initial vs. Maintenance Margin)

To trade futures, you don’t pay the full value of the contract upfront; instead, you post margin. In futures, margin is not a loan or debt (like stock margin trading) but rather a good-faith deposit or performance bond. It’s the amount of money you must have in your account to open and hold a futures position. There are two related margin levels to understand: Initial Margin and Maintenance Margin.

• Initial Margin: This is the amount you need to put up to open a new futures position. Think of it as the entry ticket or down payment for the trade. The exact initial margin is set by the exchange for each contract and can be adjusted based on volatility or market conditions. It is usually only a fraction of the contract’s total value (often around 3-12% of the notional value, depending on the product). For example, if one Gold futures contract is worth about $200,000 (say gold price ~$2000/oz * 100 oz), the exchange might require an initial margin of around $11,000 to initiate the trade. That $11k is what you must have in your account and will be held as collateral. As another example, the initial margin for a crude oil contract might be about $5,000 when the oil contract’s full value is $75,000. Once you post the initial margin and open the position, you’ve got the trade on with leverage – you’re controlling the full contract with that smaller amount of money.
• Maintenance Margin: After your trade is open, there is a slightly lower margin level called the maintenance margin that you must maintain at a certain level. This number is also set by the exchange and is typically a bit lower than the initial margin (e.g. 75-80% of the initial margin). Maintenance margin represents the minimum account balance you must keep per contract to avoid a margin call. If your account equity falls below the maintenance margin due to losses on the position, you will receive a margin call – essentially a demand to top up your account back to the initial margin level. Continuing the crude oil example, if initial margin is $5,000, the maintenance margin might be roughly $4,000. If the oil market moves against you and your account’s free equity drops such that only $3,800 is supporting that contract (below the $4,000 maintenance), you’ll be required to add funds to bring it back to the $5,000 initial margin level. If you don’t, the broker may liquidate your position to prevent further losses. Maintenance margin is a kind of threshold that, if breached, triggers a need for action.

Example scenario: You buy 1 Natural Gas futures contract. The contract’s value is $30,000 and requires $3,300 initial margin and $3,000 maintenance. You post $3,300, and the trade is live. Unfortunately, the price drops and your position is now losing money – your account is down $400 on this trade, leaving only $2,900 backing it. This is below the $3,000 maintenance margin. You’d get a margin call telling you to deposit at least $400 more to bring the balance back up. If you do, you can keep the position (now margin is restored). If you don’t, the broker will close your position to limit risk. This mechanism ensures traders can always have skin in the game using margin and reduces the chance of a default in the futures market.

From a beginner’s perspective, margin = the money set aside to secure your trade’s obligations. It’s not a fee – if you close the trade, the margin is released back to your account (plus any profits or minus losses). It’s crucial to monitor how close your account is to maintenance levels, especially in volatile markets where losses can accumulate quickly. Also note that margin requirements can change: exchanges or brokers might raise margins if market volatility spikes (meaning you’d need more funds to hold the same position). NovaBloom will typically display the current initial and maintenance margin for each contract it offers, so be sure to check those specs. Staying above maintenance margin and using prudent risk management will keep you out of trouble as you leverage your trades.

Rollover

Rollover in futures trading means moving your position from an expiring contract to a later-dated contract. As we discussed in the expiry section, each contract has a set lifespan. If you want to maintain your market exposure beyond the current contract’s expiry, you’ll need to “roll” it forward. Rolling a futures contract involves two steps done in succession: (1) closing your position in the current contract that’s nearing expiration, and (2) opening a new position in the next available contract month. For example, say it’s late August and you hold a long position in September crude oil futures (which will expire in mid-September). To roll it, you would sell the September contract and simultaneously buy the November crude oil contract (skipping October if that market uses monthly expiries, or if October is the next, you’d go into October) – effectively shifting your long position to the later month.

Typically, brokers and trading platforms let you execute a rollover as a single spread trade or via a quick sequence so that it feels seamless. The price of the new contract will likely be different from the old one (due to factors like interest rates, storage costs, or expectations – this difference is called contango or backwardation in commodities). When you roll, you’ll realize any profit or loss on the expiring contract and then continue with a fresh position in the new contract. The benefit is you avoid expiration (and any delivery or cash settlement on the old contract) while maintaining a position in the market.

For example, consider rolling an E-mini S&P 500 futures from the September contract (ES Sep) to the December contract (ES Dec). If ES Sep is trading at 5500 and ES Dec at 5515 (maybe due to interest carry costs pushing Dec slightly higher), you would sell your Sep at 5500 and buy Dec at 5515. You might incur a 15-point difference – effectively paying that spread – but now you’re long the December contract going forward. You would have closed the September before it expired (avoiding settlement) and kept your equity market exposure through December.

Why roll? Most traders roll positions to keep their positions live. Many strategies (like trend following or hedging) might require holding for longer than one contract’s duration. By rolling, you can keep a position live indefinitely across serial contracts. All active futures traders must deal with rollover if they trade contracts with expiration; it’s a routine part of futures trading. The timing of when to roll is up to the trader or broker’s guidelines. Commonly, retail traders roll on or just before the official “roll date” or last trade date set by the exchange or recommended by the broker (for stock indices, a common roll occurs the week before expiry, for example). Keep in mind that rolling isn’t free of cost – you’ll pay the normal transaction costs (commissions, spread) on exiting and re-entering. Also, the price difference means you should be mindful of any P/L impact (though theoretically the difference is just due to fair value differences, not a market gain or loss per se). In summary, rollover is your friend if you want to avoid the disruption of contract expiry. It allows you to stay in the market continuously, moving from one contract to the next, rather than being forced out on expiration day. As a beginner, just remember: if you have a winning position you want to keep, or a long-term outlook, you’ll need to roll your futures before they expire.

Liquidity

Liquidity describes how easily you can buy or sell in a market without significantly affecting the price. A highly liquid futures contract has plenty of trading volume and lots of buyers and sellers at any given time, so you can enter or exit positions quickly at fair prices. In contrast, a low-liquidity market might have wider bid-ask spreads and small trade sizes available, meaning you could move the price by placing an order, or you might not get filled immediately. In practical terms, consider two futures contracts: the E-mini S&P 500 versus, say, a regional commodity contract. The E-mini S&P (ES) is one of the most liquid futures in the world – tens of thousands of contracts trade daily, and at any moment you might see hundreds of contracts available at the next tick up or down. You can usually buy or sell ES in an instant with virtually no slippage (we’ll define slippage shortly) because so many participants are trading it. This high liquidity is reflected in very tight bid-ask spreads (often just one tick wide). Now consider a less liquid contract, like an agricultural future such as Oats or an exotic currency future. You might find that much fewer contracts trade in a day and the spread between buyers and sellers could be several ticks wide. Putting a market order in such a contract could lead to a noticeable jump in price, as the market absorbs your order, potentially giving you a worse fill.

For beginners, it’s generally advisable to trade more liquid contracts. All the products NovaBloom offers are liquid major futures: equity index futures (like the S&P 500, Nasdaq-100, Dow, Russell 2000) are very actively traded; major currency futures (EUR, GBP, JPY, etc.) are also highly liquid on the CME; major energy and metal contracts (crude oil, natural gas, gold, silver) have deep liquidity. Some micro contracts can be slightly less liquid than their larger counterparts, but usually still have enough activity to get decent fills for small orders. Liquidity matters because it affects your transaction costs and execution certainty. In a liquid market, the price you see is likely the price you get, whereas in an illiquid market, you might have to accept a worse price to execute your order.

Signs of good liquidity include high volume (many contracts traded per day), high open interest (lots of contracts outstanding), and small bid-ask spreads. You can often gauge this on a trading platform by looking at the order book or recent trading activity. Remember that liquidity can vary by time of day as well – e.g. equity index futures are most liquid during regular stock market hours, whereas some commodities might be quieter during the overnight session. In summary, liquidity = how smoothly you can trade. High liquidity provides flexibility to get in and out when you want, which is especially important if you need to exit a trade quickly to manage risk.

Volatility

Volatility in trading refers to how much and how quickly the price of an asset moves. It’s essentially the range of price fluctuations a market experiences over a given period. If the price of a futures contract stays relatively stable day to day (or moves in small, incremental steps), we say it has low volatility. If the price swings rapidly and widely (making large moves up and down), that’s high volatility. Simply put, volatility is the magnitude of price changes. A highly volatile market might hit new highs and lows in short order, with erratic or dramatic moves, whereas a low-volatility market may barely budge or drift calmly.

Different futures contracts have different typical volatility. For example, Natural Gas (NG) or Bitcoin futures can be very volatile, with prices that might swing several percent within a single day or even within hours on news. Stock index futures volatility can vary: during calm markets the S&P 500 might only move a few points a day (low vol), but during a crisis or major news it could swing dozens of points violently (high vol). Volatility is often measured by statistical tools (like standard deviation or the VIX for equities). High volatility means potentially larger profits or losses in a short time r. Low volatility means changes are slower and smaller.For beginners, it’s important to understand the typical volatility of the markets you trade so you can set realistic expectations and risk management. A common mistake is underestimating volatility – for instance, trading crude oil w can move $1 or $2 in a day, which on a full contract is $1,000-$2,000 swing (since 1 cent is $10 tick). On the flip side, a very low-volatility market might require patience or larger size to meet profit goals, which has its own challenges.

Also, volatility is not constant – it can spike due to events (e.g. an OPEC meeting can send oil volatility surging, or a central bank decision can jolt currency volatility). Keep an eye on market conditions: when volatility rises, you might need to adjust your orders with wider stop-losses and smaller position sizes, or simply be more cautious. Futures exchanges might increase margin requirements in high volatility periods,, to compensate for the greater risk. In summary, volatility = how varied price action is. Embrace that different futures have different personalities: some are wild broncos (high volatility) while others are calm oxen (low volatility). As you gain experience, you’ll choose which you prefer to trade, but always respect what a highly volatile market can do.

Slippage

Slippage is the difference between the price at which an order is expected to execute and the price at which it actually gets filled. If you place a market order to buy a futures contract at around 100.00 but by the time your order hits the market the best offer is 100.10, you’ve experienced 0.10 of slippage (you paid 0.10 more than intended). Slippage can also occur on exits – e.g. a stop order to sell might trigger at 100.00 but you actually get filled at 99.90 in a fast drop, meaning 0.10 slippage below your stop price.

Slippage is common in volatile or illiquid markets. When a market is moving very quickly (perhaps on a news release or surprise event), prices can jump past your intended level before your trade is filled. Likewise, if the market doesn’t have many participants (low liquidity), your order might “eat through” the available volume at the current price and start matching with orders at a less favorable price. For instance, if you try to buy 10 contracts but only 2 contracts are offered at the current price, the rest of your order will have to match with higher offers – causing an upward slippage on your average fill price. Generally, slippage is measured in ticks or points and it effectively increases your cost of trading.

Real-world example: Suppose you’re trading Micro Ether futures (each representing 0.1 ETH). Around a major crypto news announcement, the price is jumping around. You hit the button to go long at market when it’s showing $1800, but by the time the order executes you get $1802. That $2 move is slippage – the market moved that much in the interim (or that was the nearest seller for the size you wanted). On one micro contract, $2 might not be huge, but on a full contract or multiple contracts it adds up. Another example: you have a stop-loss on a Natural Gas futures because of an upcoming inventory report. The report is bearish, and gas prices plunge rapidly. Your stop was at $2.500, but the market gapped down and you actually get filled at $2.470. The 0.030 difference times 10,000 MMBtu is $300 of slippage beyond your planned exit.

How to mitigate slippage? Trade liquid markets and avoid market orders during extremely volatile moments if possible. High liquidity markets (like the major index and FX futures) tend to have minimal slippage under normal conditions, because there are always orders to take the other side close to the last price. Using limit orders can help ensure you don’t get worse than a certain price, though the trade-off is you might not get filled at all if the market runs away. Some traders also avoid placing big orders all at once in a thin market – instead scaling in/out to avoid shocking the order book. Slippage can also be positive (you unexpectedly get a better price), but that’s less common in fast moves – usually it works against you because you’re crossing the spread.

As a new trader, don’t be alarmed by small slippage; a tick or two of difference occasionally is normal. But if you consistently see large slippage, analyze why: Are you trading during major news releases or after-hours when liquidity is low? Are you using market orders on a contract with wide spreads? These factors can be adjusted. Over time, slippage is one of those friction costs like commissions – you want to keep it as low as possible. The good news is that all the popular futures (e.g. E-mini S&P, Treasury bonds, gold, etc.) have very tight markets where slippage is typically minimal except in times of high volatility. By focusing on those and being smart about order placement, you can largely avoid nasty surprises.

Now that we’ve clarified these key terms – from tick size and contract specs to margin, leverage, and market dynamics – you should feel more comfortable reading futures contract details and discussing trading plans. It’s a lot of new vocabulary, but each term plays an important role in how futures markets function and how we trade them. Keep this guide handy as you continue your futures journey, and you’ll steadily build confidence in using these concepts. Below, we’ve compiled a list of frequently asked questions to reinforce your understanding and address common beginner doubts about futures terminology.

FAQs